Time for a dividend policy at RIM
RIM’s (RIM:TSX, RIMM:NASDAQ) co-founders are not known to be miserly. Many good and worthy causes have benefited from the personal generousity of Mike Lazaridis and Jim Balsillie. Why then, have they yet to share any of Research in Motion’s cash horde with shareholders?
For the 3rd quarter ended December 2007, RIM announced a cash balance of US$1.6 billion, generated a net income of US$370 million, and increased cash by US$342 million after capex, inventory and working capital changes.
As far as we shareholders know, there are no other NTP’s lurking out there, so the need to maintain a massive patent litigation kitty is no more. As an acquiror of companies, RIM has never shown much of a prediliction for large acquisitions, with little more than a small tuckunder on their radar screen at any given time.
There’s still the issue of potential enforcement action against both the company and certain senior executives, as RIM itself disclosed in their recent quarterly report:
Each of the SEC, the OSC and the office of the United States Attorney for the Southern District of New York (the “USAO”) has commenced investigations in connection with the Company’s stock option granting practices. The Company continues to cooperate with each of these agencies. While it is not possible to predict at this time what action may result from the investigations, the Company anticipates that RIM or certain of its directors or officers may be subject to potential enforcement action or prosecution, which if successful, could result in civil or criminal penalties or other remedies.
But really, how much could any settlement cost, if there’s anything to settle at all?
When compared to other large tech players, RIM’s cash from operations figures are decent at 22.7% of LTM revenue according to a recently released GMP Securities research report. Qualcomm enjoys 42%, Google is at 34.8%, Yahoo is at 27.5% and Apple rounds out the dataset at 24.3%. But on a return on equity basis, RIM’s ahead of them all at 37%. Palm’s a weak 3.7%, and Motorola comes in a -0.3%.
With an average fiscal 2009 earnings forecast of US$3.44, and maybe US$4.70 for 2010, RIM will generate at least $4 billion of free cash flow over the next two fiscal years (assuming 15% of earnings go to capex and working capital).
Does RIM really need to exit 2010 with US$5.6 billion of cash in an environment where short term corporate cash deposits generate 3% interest at the high end? I think not.
A 1% annual dividend yield (US$1 a share per annum) doesn’t sound like much for starters, and it’ll only rob RIM of about US$574 million of the US$1.9 billion in earnings that 2009 is expected to bring. Microsoft (MSFT:NASDAQ), by comparison, pays a dividend yield of about 1.5%. But 1% would be a nice place to start, and is low enough to leave plenty of room for quarterly dividend raises for years to come.
The nay-sayers will tell you that it’s unthinkable for fast-growing tech companies to pay a dividend. That it would send the wrong message if RIM was to declare that there was no better use for its cash than to return it to shareholders.
I disagree. Dividends speak to financial stability, not a lack of growth opportunities. Where is that excess cash best deployed? Acquiring Motorola (RIM’s market cap. is now 3x’s MOT’s), for example, or sharing the free cash generated by RIM with the individuals and institutions who own RIM?
Moreover, a 1% yield in 2009 and 2010 will still “starve” RIM of just 27% of the net income forecast for the business over the next two years. Even after initiating a dividend policy, Jim and Mike will be left with about US$3 billion more in cash at the end of fiscal 2010 than they currently need to keep RIM afloat. Surely no one thinks RIM is currently undercapitalized by US$4.2 billion in cash.
The only other reason why an executive team might want to shield themselves from establishing a dividend is the fear that the business may turn dramatically for the worse down the road. If RIM executives don’t have the confidence to sign-up to the 2009 and 2010 earnings forecasts currently out in the marketplace, it’s high time they came clean on that front.
For Mike and Jim, two key beneficiaries of any dividend policy, it might seem to self-enriching to put the topic on the table themselves. Fair enough. I’m happy to do it for them.
Like any addiction, it is hard to separate a cash horde from technology executives who rightly thought that raising $100 million via a prospectus in 1997 was a herculean feat. But the time has come, gentlemen, to share the bounty.
Share buybacks have a habit of making employee stock options more valuable. Dividends are the only pure method of returning a portion of a company’s profits to its owners.
(disclosure – I own RIM)
Sounds like they are just saving for a rainy day.
Their prudence will be applauded when the clouds give way to the sun, the moon, and stars…and the i-phone.
“Such power there is in clear-eyed self-restraint.”
James Russell Lowell
Or, maybe they’re just cheap bastards…
Through a 1% dividend yield, if they loose 27% of earnings in 2009/10, how will the share price justify such lofty multiples! Add to that the “perception” of a loosing the growth-stock status.
I bet there are some pressures felt by management to payout that cash kitty.
Solution: one-time dividend like Microsoft to quell the demand. Maybe?
RIM wouldn’t “lose” 27% of their earnings if they established a dividend policy. They’d be taking 27% of their free cash flow (ie after earnings were reported; a non-income statement event) and sending those funds back to shareholders. They only thing they would “lose” in the post-dividend era that could impact earnings would be the income they generate on the incremental cash balance. If $572 million of cash was used for a dividend, the notional foregone income would represent the after tax interest income benefit of those funds had they been left in a bank generating 3%. The hit to earnings would be a rounding error in that case.
Mad Jim Cramer says to buy RIMM. Wasn’t he pushing Bear a few weeks back?
Sell 40 shares!